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Complicated land development tax issues

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Hi,

A client and her sister were gifted some agricultural land by her dad in 2013. The dad then left to become resident in Gibralter and since Brexit has become domiciled in Spain. The client started an initial planning application in 2016 and between the client and her sister spent in the region of £150k. Outline planning permission was granted in 2019, however with the local plan, 40% of this development must be social housing and the client must also make a cash contribution towards the schools/ council, etc of around £274k.

With this in mind the clients preferred option is to sell 9 individual plots, develop one plot herself and one for her sister as self builds and retain some land. With this route the client would still need to make a contribution towards th local services, however this would be proportional with 9 houses. The client would also need to provide all services, utilities and roads if they went down this route. This is likely to cost in the region of £450k however each plot is likely to be sold for in the region of £230k as well as having nice houses each at cost.

The client is looking for the most effective tax planning solutions, however there is lots to consider. Any thoughts/ ideas would be much appreciated.

Replies (24)

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By Justin Bryant
01st Jun 2020 14:54

If this is currently held as capital (CGT) rather than revenue (trading stock), then a s162 incorporation may be a sensible 1st step.

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Replying to Justin Bryant:
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By Tax Dragon
01st Jun 2020 16:07

Or it might not. The plan (as I read it) is to sell 7 of the plots undeveloped and live on the remaining two once developed.

If that's right, then I suspect a s162 incorporation (even if the conditions to do that are met) adds to, rather than reduces, the tax issues/risks.

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Replying to Tax Dragon:
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By Justin Bryant
01st Jun 2020 16:15

You only need a few brain cells to work out how to avoid potential problem issues there.

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Replying to Justin Bryant:
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By Tax Dragon
01st Jun 2020 16:21

Humour me then.

What problem does s162 solve, that can't otherwise similarly be solved with a few brain cells?

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Replying to Tax Dragon:
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By Justin Bryant
01st Jun 2020 16:37

Eh? You can't even frame your questions properly.

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Replying to Justin Bryant:
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By Tax Dragon
01st Jun 2020 17:02

Justin Bryant wrote:

Eh? You can't even frame your questions properly.

You are such an unartful dodger.

You suggested s162. Why? What do you think it achieves?

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Replying to Tax Dragon:
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By Justin Bryant
02nd Jun 2020 09:10

Something beginning with m. I'm sure even WP could enlighten you on the benefits thereafter (if not, 10 seconds reviewing UK tax table rates will shed some light).

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Replying to Justin Bryant:
Psycho
By Wilson Philips
01st Jun 2020 16:41

If land is currently held as a capital asset then where is the business that might be transferred as a going concern?

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Replying to Wilson Philips:
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By Justin Bryant
02nd Jun 2020 09:48

As I'm not the client I'm not sure why you're asking me, but the threshold is quite low as has been stated here before (it's hardly a hobby or akin to an ISA etc. is it?) and it ain't difficult (with the help of not many brain cells) to make it a business is it (if it otherwise wouldn't be)?

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jun 2020 09:42

Justin Bryant wrote:

...it's hardly a hobby is it? ...make it a business...

"It"?

Have you read the OP?

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Replying to Justin Bryant:
Psycho
By Wilson Philips
02nd Jun 2020 10:15

I was asking you because I was curious as to what business you thought might exist, in the context of the specific circumstances outlined, if the land were being held as a capital asset and not as trading stock.

If it's a business, what type of business - a property development business? And if a property development business, the land isn't (or shouldn't be) held as a capital asset, should it? So if it is so held, presumably the first step, before contemplating any kind of incorporation, would be to sort that out?

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jun 2020 10:33

But if Justin's "it" is a property development business, his opening capital v revenue caveat is a complete non sequitur. That's not possible, because Justin is always so precise and accurate. (So, good guess about what "it" is, but plainly wrong.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jun 2020 11:35

Presumably, then - we may never know - he thinks that "some agricultural land" amounts to a farming business. But even if it does, the spending of £150k on planning consent might - together with the other information provided - suggest an intention to develop.

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jun 2020 11:50

It's interesting that you, Justin and everyone else (if I follow your and everybody else's points correctly [still struggling with some of Justin's, TBH]) appear to be reading the scenario as one where the sisters will do the developing.

My reading (reinforced by the sale price per plot of £230k - we don't know where this is, but that seems quite low for a "nice house" in much of the country, these days), is that the sisters are selling 7 (or 9) plots for development, possibly with part of the proceeds being that the developers build the sisters a house each.

Sometimes I do wish that OPs would join in with the conversation, to give a bit of clarity and direction. The tax issues in the two scenarios are wholly (well, 99%ly) different.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jun 2020 11:59

I agree - none of us (including Justin) can really know what is going on here. When I read the 'however' in the first paragraph, I inferred (perhaps erroneously) a change of intention (from developing) to selling. Perhaps the intention all along had been to sell with planning consent - which returns me to the question as to what business there might be that would be ripe for a s162 incorporation.

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Replying to Wilson Philips:
Hallerud at Easter
By DJKL
02nd Jun 2020 13:50

Property development is of course a business.

If land was used by sisters as agricultural land then possibly appropriation to stock from fixed assets is needed, but it may be that at outset sisters did not have land as a business asset until they launched into the planning process and even their chasing of planning may not constitute the start of a business, it may be merely something done to get best price re an asset liable to CGT.

Where I suspect they cross the line to be firmly in development territory is with the intent to service the plots and sell serviced plots, that to me certainly indicates trading intentions, that is more than a piece of paper re the land, that is changing the land.

However still no idea if incorporation is the way to go anyway, given taxes on profits and then if cash wanted upon extraction, and the need to really totally complete everything before getting cheap cash extraction, maybe the flexibility of an LLP works better- there is no way any of us can determine best approach without chatting with the clients re their needs and wants.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
02nd Jun 2020 12:10

That is because the OP says the clients (sisters) would need to spend £45ok on putting in the services which strongly suggests they are selling serviced plots, if they were selling to a builder the entire 7 or 9 plots as a unum quid they would have no need to install the services.

Added point-

In effect their business is not building finished houses but selling serviced plots, which if it is the case has all sorts of vat issues as from memory sale of individual plots to buyers to self build is an exempt supply. (Been there/got the tee shirt re a development we did years ago up near Elgin where the input vat (which was complex anyway as there were existing dwellings on the site and new builds to be built on the site) all unraveled as the plots were not purchased by a builder en masse but by individuals.

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Replying to DJKL:
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By Tax Dragon
02nd Jun 2020 12:28

Still plots, not houses, though. (Thank you for the added point; that's helpful.)

I've said all I have that's useful to say. I'll leave with a quote:

s162(1) wrote:

This section shall apply... where a person who is not a company transfers to a company a business as a going concern [Wilson's quote/point], together with the whole assets of the business [my point]...

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Replying to Tax Dragon:
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By littletosh
02nd Jun 2020 12:11

Thanks for the updates so far. TBH I did feel a little uncomfortable replying as some of the responses seemed to come across quite agressive. The land was previously held as poor quality pasture land. There have been animals grazing on the land in an informal arrangement for which no cash was received. I would have considered the transfer to the client as a capital transaction rather than income and it was the fathers intention to dispose of his assets before heading offshore. It was his hope the land would be developed by his daughters but he never made any enquiries into it and did not have the energy to pursue. In terms of plots - it would be 9 sold for development with an additional one each retained for personal development.
Whilst the initial costs have been borne personally the clients are considering the best route for the development and it would seem incorporation would be the best option?
Thanks again.

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Replying to Wilson Philips:
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By Justin Bryant
02nd Jun 2020 12:09

The only possible business it could be re s162 is (obviously) a property investment business. I think I'll end there as the comments are becoming dumber & dumber.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
02nd Jun 2020 12:25

Justin Bryant wrote:
the comments are becoming dumber & dumber.

Agreed - that last one of yours being a good example.

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chips_at_mattersey
By Les Howard
01st Jun 2020 17:05

… you haven't mentioned VAT.

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Hallerud at Easter
By DJKL
01st Jun 2020 21:09

Well as we have done these sorts of things in the past I can give you some generic advice.

1. Really decide what you want to do with each bit of land and try really hard not to change your mind later, as that may be expensive/ very difficult.

2. Once that sorted as best as can be look at what can be done now, whilst values are still modest,with the titles to the various parts, in particular where there are shared common areas/roads (maybe to be adopted) etc sort whatever in, presumably England, I would call up here a Deed of Condition re the land; this governs how these bits are to owned/managed/ maintained going forward etc, but also control things like what can be built, colour palette/materials permitted, how many floors, footplate and overall sizes of buildings , are campervans allowed on driveways, hedges and their heights, washing being hung in front gardens, the list is endless..

3.When doing this look at what is likely to happen with each part, is it to be converted to profit or personally retained, if retained will it be the individual's PPR, where should that title rest etc etc? This will possibly steer vehicles to be used re each bit

4. Do check with planning if the affordable housing contribution can be commuted to cash and staged re payment and at what point each payment needs to be made. Also see if offsite affordable housing is an option as on site may blight values. Presumably you have a section 106 in place (Our Section 75), ensure you can either divide the obligations out to successors in title re parts or deal with the payments as developer later yourself. Catch is if due on completion of dwellings once you sell the plots timing re these completions are outwith your control, you can be hanging around for years, so your solicitors need to think this through re development control and how long you retain rights, a lot of analysis/thought is needed.

5. Consider what you want to do with development profits, do you want these in personal hands or can they remain in a company, remember also you may have residual obligations (Say roads get top surfaced x years down the line, as you do not want site traffic churning the wearing coat as each plot buyer builds his/her house) so legal entity may need to endure until all this is sorted, especially if retentions o/s from plot purchasers for you to do final works, this may make winding up entity to extract cash tricky.

6. Vat re selling house plots to individuals has issues, you must look into this or all vat on the works/planning/professional may not be reclaimable and will effectively become your cost, there may be no solution re this, but there may be an angle re servicing the plots to be retained under self build vat rules-advice is needed.

7. Never forget some solutions can be found using contracts with your own/other construction company to performs works etc rather than move property by sale which can be expensive, JVs etc with entities you control can sometimes be useful, a good prof team that has been there and done it may have some clever ideas.

The generic secret is a good team, solicitor versed in site development/plot sales, accountant versed in taxes especially vat, taxes on profit plus SDLT issues, possibly architect,planning consultant, general guru/agent who has been round the block and you may also need an overall project manager, if a bank involved likely a QS re works valuation will also be appointed by the bank and if getting in contractors a QS re tendering etc is advisable.

The key areas are the team, think all through before acting not after and really trying not to change your mind about what you are doing once started.

Edited as had not picked up affordable was on site units, had thought it was a cash sum.

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Replying to DJKL:
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By Tax Dragon
02nd Jun 2020 06:51

@Justin, you could learn something from DJKL here. You need to identify the issues before you are in a position to consider approaches to dealing with those issues. That's why I took umbrage at your replies(*) above. And that's why I challenged you to explain yourself. (Quite apart from the fact that s162 is not an option if the sisters are to retain two houses and some of the land, as stated.)

(*) not at you - at your replies, which were more like Trumpian tweets than actual answers.

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